Ohio lawmakers consider end of ‘LLC loophole’

LIMA — Lawmakers may revise a tax break that allows small businesses and pass-through entities like limited liability companies to pay no state income tax on up to $250,000 in business income.

The tax break, known as the business income deduction, was claimed on nearly 700,000 personal income tax returns for 2017, totaling more than $29 billion, according to Ohio Department of Taxation records.

Critics claim the credit, while intended for small business, is being abused by those who form limited liability companies to avoid taxes.

“We would like to see something better than this that is tied to employment, that is tied to people keeping the money in their businesses,” said Majority Whip Rep. Jay Edwards, R-Nelsonville. “It’s just hard to justify that you have somebody that’s not employing anybody that is able to make $250,000 free money.”

David McClough, an associate professor of economics for the Dicke College of Business at Ohio Northern University, said these sorts of tax avoidance strategies are popular.

“What Ohio is doing is recognizing that a lot of this pass-through income probably isn’t being used in the ways that proponents of a particular ideology would predict,” McClough said. “Chances are that no significant portion of that $250,000 in business income is being put back into the business. That’s going back into the owner’s pocket.”

Last week, the Ohio House of Representatives voted to lower how much those who claim the business income deduction can write-off from their state income tax bills from $250,000 to $100,000.

Still, the proposal has been met with resistance from business groups that say lowering the deduction would amount to a significant tax increase on small business.

“Instead of eliminating it, why don’t we make it better and more targeted and more associated with small business employment,” said Robert Sielschott, a senior partner with CPA firm Sielschott, Walsh, Keifer and Regula CPAs and an area council chairman for the National Federation of Independent Businesses.

Sielschott said the credit was originally created to lower the tax burden for small business owners, who were paying income taxes and the state’s commercial activity tax while large corporations saw their tax obligations reduced.

Some area employers are worried changes to the business income deduction will be harmful to their business.

That’s the case for Tracie Sanchez, president of the Lima Pallet Company, who said she won’t be able to afford pay raises for her 60 employees if the business income deduction is lowered.

“There will be no pay raises,” she said. “There will be no more reinvesting in my company. It just puts us at a huge disadvantage compared to big corporations.”

The House budget also cuts personal income tax rates by 6.6% and eliminates income taxes altogether for those making less than $22,250. The House estimates the tax cut will amount to $108 million annually.

Both the tax cut and change to the business income deduction will be considered by the Senate as it works toward its own version of the budget.